Sometimes the world can be a messy place. Global markets get
discombobulated. That has been the case in the first few trading days of
the year. Saudi Arabia and Iran are about as friendly as cats and dogs,
China’s economic growth is grinding slower, and then, in left field,
North Korea drops a bomb, or at least tests a bomb, maybe.

North Korea announced that scientists had successfully detonated a
hydrogen bomb. The U.S. Geological Survey reported that a magnitude 5.1
earthquake was triggered near North Korea’s nuclear test site in the
northeast of the country, but could not confirm that it was related to
an H-bomb test.

China’s central bank
set the yuan’s reference rate at an unexpectedly weak level, a reminder
of the shock depreciation in August that sparked a wave of
financial-market turmoil. Chinese media said that last summer’s selling
ban on major shareholders would remain in place until the government
publishes new rules on such sales. The Shanghai Composite Index jumped
2.3 percent. Emerging-market stocks dropped to a six-year low and
developing-nation currencies declined versus the dollar, while shares in
Europe resumed losses after closing higher on Tuesday. Investors are
continuing to replace risky assets with safe havens such as Japanese
yen, U.S. Treasuries, German Bunds and gold.

Surely this was not what the Federal Reserve was expecting in
December when they raised interest rates above zero for the first time
in nearly a decade. Today, we found out more about what the Fed was
thinking with the publication of the FOMC meeting minutes.
The official account emphasized the expectation of Fed officials that
“economic conditions would evolve in a manner that would warrant only
gradual increases in the federal funds rate” over the next year. And
that is the plan if everything goes well. The minutes indicate that some
officials are worried the Fed is once again overestimating the health
of the economy.

And even though the vote to hike rates was unanimous,
there were some nervous and reticent voters. The Fed is expected to
raise interest rates by about one percentage point over the next year,
an expectation based on the predictions of Fed officials in their
December economic forecasts, and confirmed today by Federal Reserve Vice
Chairman Stanley Fischer. In an interview on CNBC, Fischer said that
four rate hikes by the U.S. central bank this year is close to his
expectations, but added that global uncertainty could still veer this
path off course.

Fed officials generally expect the strength of the domestic economy,
propelled by increased consumer spending, to outweigh the weakness of
the global economy. We had confirmation of this line of reasoning today
in the ISM non-manufacturing survey. The Institute for Supply Management’s non-manufacturing index,
which covers almost 90 percent of the economy, came in at 55.3 last
month. While the level is down from November’s 55.9 and the weakest
since April 2014, readings greater than 50 signal growth. In other
words, the domestic economy is still chugging along, but the rest of the
world is weighing on things.

And the Fed minutes included economic forecasts that sound good. The
medium-term projection for real GDP growth was revised up slightly, on
balance, from the previous forecast, primarily because of the recently
passed Bipartisan Budget. The forecast for inflation was revised down
slightly in the near term in response to recent data for consumer prices
and the further decline in the price of crude oil but they feel
confident they will hit their 2% inflation target by next year.

Even
after stripping out volatile food and energy components, prices rose
just 1.3 percent in the 12 months through November, according to the
Fed’s preferred measure for core inflation. The thinking is that oil
prices will start to move higher later this year. Also, the longstanding
pattern is that inflation rises as unemployment declines.

Most of the news on the labor market has been good. Private-sector employment gains ramped up last month.
ADP reports employers added 257,000 jobs in December. This is the
strongest gain since December 2014. The ADP report is used as an early
indicator of the Labor Department’s employment report, which will be
released Friday and covers government jobs in addition to those in the
private sector. The past two years have shown some of the best job
growth since the 1990s.

The good news on employment has not translated into higher wages and
that means there has been no inflationary pressures from all the job
gains. Under normal circumstances, the Fed’s forecast of higher
inflation might pan out, but the global economy is weak and that is
having a deflationary impact.

In a separate report today, the nation’s trade deficit dropped 5%
in November to the smallest amount in a year, but not because the
economy is much improved: U.S. exports fell slightly, hitting the lowest
level since the start of 2012, and imports dropped even faster. The
trade gap declined to a seasonally adjusted $42.4 billion from $44.6
billion in October. U.S. exports slipped 0.9% to $182 billion in
November. Imports fell a sharper 1.7% to $224 billion. The lower deficit
in November was largely the result of falling imports of electronic
goods as well as lower prices for crude oil and other commodities.

Still, the Fed was willing to hike rates despite tangible evidence.
The question is how long they will continue to raise rates absent some
signs of inflation. Financial markets expect only two quarter-point
increases this year, according to pricing in federal funds futures. Fed
vice chair Stanley Fischer said today, “We make our own analysis and our
analysis says that the market is under-estimating where we’re going to
be.” Maybe. Or perhaps the Fed is over-estimating where the economy is
going to be.

Brent crude slipped to a fresh 11-year low overnight, while WTI
dropped below $34 per barrel. Oil prices came under pressure as the World Bank predicted China’s
troubles will spill over to emerging markets, which will face the
decline in commodity prices. In addition to the economic concerns and
geopolitical issues, the market remains overwhelmed with a global glut
of oil. Saudi Arabia, the largest producer in OPEC, has refused to cut
production. And many US producers have kept oil wells flowing despite
the crushing financial blow of low prices.

Taken together, it’s a
formula for a prolonged period of low prices. Today, the Energy
Information Agency reported gasoline inventories last week surged the
most since 1993. Gasoline stocks rose 10.6 million barrels in the week
ending Jan. 1 compared with expectations for a 2.3 million-barrel gain.
That sent futures to the lowest since 2009.

As fuel prices fall, three of the largest U.S. airlines said
they will charge customers more. Delta Air Lines increased prices on
flights by up to $4 one-way and Southwest Airlines followed suit.
American Airlines also raised domestic fares to match its rivals. While
U.S. airlines regularly adjust their fares, hiking prices for nearly all
domestic flights is less common and an industry-wide match even less
so, and then to do a rate hike with fuel prices dropping – well, thank
you, thank you very much.

U.S. regulators have grown so concerned that
traders are using high-speed computers to manipulate markets that
they’re planning a new tactic to clamp down on the practice. The
Financial Industry Regulatory Authority said it plans to issue report
cards this year that will grade firms on how much spoofing flows through
their order books, and expects brokers to use the assessments to root
out misconduct.

Shares of Apple slid 2.5% on Tuesday following
a report that suggested the tech giant may significantly slash its
iPhone 6S and 6S Plus output. Japanese news outlet Nikkei reported
Apple is expected to reduce production on its flagship device by about
30% between January and March. Apple suppliers Cirrus Logic, Skyworks,
Qorvo, Avago, and InvenSense also tumbled on the news.

Puerto Rico’s latest default means
a $10.3 million hit for Ambac Financial, which insures some of the debt
the island’s infrastructure authority PRIFA failed to disburse on
Monday. The payment on its own is small for Ambac, but with more than $2
billion total par exposure to Puerto Rican debt, the company could be
in trouble if defaults continue.

Chipotle Mexican Grill has
been served with a grand jury subpoena as part of a criminal
investigation related to a norovirus outbreak at a California
restaurant. The disclosure came as the chain projected a double-digit
decline in sales after several outbreaks linked to food-borne illnesses.
The company will formally report its financial results on Feb. 2, but
today Chipotle warned investors that it expected a drop of 14.6 percent
in same-store sales for its fourth quarter. For the full month of
December, same-store restaurant sales were down 30 percent.

The
norovirus outbreak happened in Simi Valley, California in August
followed by another outbreak near Boston College in December, and that
is in addition to E. Coli outbreaks in several states. All told, more
than 500 people were sickened after eating in a Chipotle restaurant in
the last half of 2015. Bon appetit.

Twitter is building a feature that
will allow for posts much longer than its standard 140 characters, and
is currently considering a 10,000-character limit. An end-of-first
quarter launch is targeted. Apparently the idea that brevity would
engender a respect for eloquence just hasn’t panned out.

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